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Dr Muriel Newman

Rating the Budget

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In Thursday’s budget speech the Minister of Finance, Bill English announced that this budget had four main objectives: “The first is lifting the long-term performance of the economy. The second is reform of the tax system, to make it fairer, more sustainable and more supporting of economic growth. The third is better delivery of public services, to make them better for users of those services and better for taxpayers. The fourth is to maintain firm control of the Government’s finances, so we can return to budget surpluses and pull back our rising debt.”[1]

Let’s examine some of these goals.

Firstly, lifting the long-term performance of the economy was at the heart of the government’s commitment to catching Australia by 2025. Mapping out a plan to achieve that goal was the central task of Don Brash’s 2025 Taskforce, which National established as part of the confidence and supply agreement with the ACT Party. The Taskforce identified excessive government spending as a key barrier to growth. It recommended that core Government spending, which had risen to around 36 percent of GDP should be reduced to 29 percent by 2012/13, the same share that it was in 2004 and 2005. Beyond that, it suggested that government spending should continue to be reduced further, with one option being the introduction of a cap on public spending along the lines of that in place in the US State of Colorado, where a public referendum must be held if the government wants to increase real per capita spending levels above the agreed cap.[2]

However, the 2010 budget tables show that rather than reducing, government spending is continuing on the upward trend that has seen expenditure increase by 50 percent over the last five years. In particular, during 2009 the government spent $1.6 billion more than budgeted, and has now raised the spending forecast for next year by $3.6 billion. In other words, rather than reducing core government spending, National is increasing it. This means that in spite of the fine words, the goal of lifting the country’s long-term performance will never be achieved as long as National continues to maintain the Labour Government’s spending spree.

The second objective was the reform of the tax system, and on this count National has certainly made progress. As a result of the tax cuts announced in the budget almost three-quarters of taxpayers will now pay no more than 17.5 percent tax, significantly improving the incentives in the economy for hard work, thrift and enterprise.

What is curious about their tax changes however, is that National did not ‘align’ the top rate of personal tax with company tax and trust tax rates, even though such alignment is well recognised as being crucial to the good design of a tax system, since it eliminates the propensity for complex tax planning to avoid tax liabilities. In addition, aligning these taxes was a key part of National’s Confidence and Supply Agreement with ACT, and was also recommended by the 2025 Taskforce and the Tax Working Group.

National’s reduction of company tax to 28 percent has been heralded as a smart move, given that the average company tax rate amongst OECD countries has been consistently falling over recent years and is now 26.3 percent, but the changes announced to depreciation rules on commercial property have been soundly criticised, largely because they apply to existing assets as well as those purchased after the Budget date.

This lowering of company tax should signal a commitment to the on-going flattening of the tax structure, with the top personal tax rate and trust tax rate all aligned to a still lower corporate rate in the next budget. The point is that if poor quality government spending is axed, there is no reason why taxpayers should not be able to look forward to a future where tax rates are further reduced towards the top rate of 20 percent recommended by the 2025 Taskforce.

National’s aversion to cutting wasteful spending to fund these tax reductions, has meant that GST has had to be increased to 15 percent. This tax rise will add a significant cost burden on Kiwi families that is totally unnecessary. With the government planning to spend a whopping $64.7 billion during the next financial year, there was ample opportunity to have found sufficient cost-savings so as to have avoided an increase in GST.

So, what sorts of programmes could have been eliminated in order to lower government spending and avoid a rise in GST? Let’s have a look.

Given that over 4,400 readers of this newsletter signed a petition to the Prime Minister requesting that he suspend the Emissions Trading Scheme (see details here ), we will look at spending associated with the emissions trading scheme.

The budget appropriations to the ‘Vote Climate Change’ amount to an astonishing $1.085 billion of taxpayers’ money. This include $29 million for a national carbon accounting system, $12 million for policy advice on the Kyoto Protocol and Emissions Trading Scheme, $1.034 billion for emission units, $300,000 to the Climate Change Development Fund for international projects, $127,000 for the United Nations Framework Convention on Climate Change, $8 million for Permanent Forest Sink Initiative participants, and over $2 million to purchase emissions units from the Project to Reduce Emissions (PRE).

In addition, there are substantial emissions trading scheme related costs within ‘Vote Agriculture and Forestry’ that are included within the $75 million appropriation which covers among other things the implementation of the Emissions Trading Scheme and indigenous forestry provisions, and the $10 million appropriation that includes expenses for climate change research and related matters.

In ‘Vote Energy’, a $33 million appropriation includes “the implementation of the New Zealand emissions trading scheme and associated emissions unit register”, and the $100 million Warm Up New Zealand: Heat Start Programme is a direct cost arising from the Kyoto Protocol.

There are millions of dollars worth of ‘smaller’ appropriations associated with the emissions trading scheme that are buried deep within the budget’s fine print – like the $4 million in the Ministry of Economic Development’s budget and around $1 million associated with the Ministry of the Environment’s carbon accounting system. Included in this round-up will be the cost of carbon auditing that will need to be carried out by all government agencies, as well as the on-going costs associated with jetting armies of government officials around the world over the next 12 months in pursuit of their mission to reduce carbon emissions.

So all in all, a conservative estimate is that the up-front cost associated with the emissions trading scheme is in the region of $1.5 billion. With the increase in GST expected to raise around $1.59 billion, if the emissions trading scheme was cancelled, there would be no need to increase GST. There would also be a further saving of $420 million, as the compensation increases in government income support payments would not need to go ahead.

And that’s not all. To see what an utter waste of taxpayers’ money it is spending $1.5 billion on emissions trading scheme costs, one need look no further than Treasury’s website where New Zealand’s status with regards to our Kyoto Protocol liabilities is listed: “The estimate of New Zealand’s position at 31 March 2010 is a $NZ231 million net asset – based on an underlying price of 10.75 Euro.” In other words, $1.5 billion of taxpayers’ money will be poured into a big black hole because the country has been in a credit position for well over 12 months and looks like staying that way until 2012 when any liabilities are due (not that any of that matters anyway, because no mechanism was ever put in place to collect any money that a country might owe once the Kyoto Protocol expires in 2012)!

The third and fourth budget priorities for the government are the better delivery of public services, and maintaining firm control of the Government’s finances so we can return to budget surpluses and pull back our rising debt.

This week’s NZCPR Guest Commentator, Roger Kerr from the Business Roundtable has examined the budget and in his article Budget a Good Rolling Maul But Not a game Changer, has this to say:

“Government spending remains a big Achilles heel. With core Crown spending at 34.7% of GDP for the coming year (nearly a $6 billion or 9% increase) and local government spending coming on top, it is far too high for fast growth. Together with rises in electricity and fuel prices arising from the ETS, higher ACC levies and the GST increase, it will put added pressure on monetary policy and the export sector.

“Despite efforts to put a lid on spending, the forecast ratio of spending to GDP is higher each year to 2014 than under the Labour government, except for its last year. Government borrowing at $7 billion in the coming year remains at high levels, and debt servicing costs are set to rise to $4.5 billion in 2014.

“The fiscal crises in Europe and the stagnant growth outlook for European economies are a sober warning of the perils of high levels of government spending and borrowing. From a growth perspective, there were numerous gaps in the budget. The government seems to be making little progress on regulatory reform; no timetable was indicated for achieving its goal of maximum income tax rates of 30%; no progress was reported on opening ACC up to competition; and the ETS remains in place despite Australia’s decision to defer a similar scheme. Moreover, of the 50+ recommendations of the 2025 Taskforce, only a handful are in the process of being adopted. And just this week New Zealand fell five places (while Australia rose two places) on the World Competitiveness Scoreboard.”

While the budget has undoubtedly made positive progress in changing some of the important incentives that operate in our economy, there is clearly a great deal more to be done (such as reducing wasteful government spending and tackling the country’s excessive dependence on social welfare) if we are to achieve the high levels of economic growth that will deliver rising living standards and allow us to catch Australia.

1.Bill English, 2010 Budget Speech
2.2025 Taskforce, Closing the Income Gap with Australia